Might the Prius One Day Get a Chinese Heart?

In the trunk of every Toyota Prius is the hybrid battery that bestows its market appeal. If Beijing has its way, the batteries might all say "Made in China."

The Middle Kingdom controls 95% of the world's supply of rare earth, a class of metallic ores used not just in Prius batteries but in a wide range of high-technology applications, from sonar systems to wind turbines, mobile phones and fluorescent lights.

So when Beijing drafted a policy last month about trimming its already shrinking annual export quota for rare earth, and potentially banning the export of some of these ores, alarm bells sounded in corporate boardrooms and foreign government officials started talking World Trade Organization action. This week, a Chinese company's bid for a stake in an Australian rare earth mining company was held up - again - by Australian regulators.

China is looking to put a floor under prices, which have declined by anything up to 60% in the past year, suffering the fallout of the global economic slowdown.

In recent days, officials have been finessing their language, making reassurances that they don't really want to hoard the ores. All they want, they say, is for manufacturers to set up shop in China to make all their high-tech stuff. That way they can have easy access to rare earth.

For a company like Toyota, a stable supply is essential. The Prius, according to a report by commodities consultant Jack Lifton, uses at least 12 kg of rare-earth metal lanthanium for each battery.

"Japanese industry is feeling worried about stable supply from China," says Shigeo Nakamura, of rare earth trader Advanced Material Japan Corp. He says Japanese industry have tried to reduce the amount of rare earth needed in hybrid car batteries, though "substitution is impossible.”

Companies like Toyota and Sumitomo have already started to develop alternative rare earth sources in places like Kazakhstan and Vietnam. The trouble is it takes a long time to develop a rare earth mine on a commercial scale. Dudley Kingsnorth, a prominent industry consultant, notes it took the Mt. Weld mine in Australia more than 10 years to get going.

All this gives China an extraordinary - some might say unfair - opportunity to lead the race to dominate the manufacture of cutting-edge technology.

Those relying on such ores may very well be forced in the near term to invest in rare earth development in Inner Mongolia, Jiangxi and some other southern provinces to secure supply. In fact, some companies already have done just that. Right now, it's stuff like X-ray screen makers, phosphor-panel and lamp manufacturers and other electronics firms that have set up joint ventures in China.

What China is waiting for is for the really high-end technology with mass market leverage like hybrid car batteries to beat a path to its door. Beijing will be operating with a finite window to garner an advantage with high-end manufacturers. But for now at least, when it comes to rare earth, it holds most of the cards.